Minimal start up capital – finally some common sense in the Parliament

Earlier this week the members of the Parliament passed after a first reading amendments to the Commercial Act, by which the required minimal capital for registration of a limited liability company and joint stock company was reduced 10 times – to 500 and 5 000 levs respectively, from 5 000 and 50 000 levs. This was a bit unexpected, since in the first place the initiator of the change was a representative from the opposition – Mr. Martin Dimitrov (UDF), while as the analysis of the parliamentary practice in Bulgaria shows it is very rarely the case that a proposal by the opposition could pass through the very tight party-legal pipeline of the majority[1]. On the second place, to a very large extend due to the lack of practice for preliminary evaluation of the impact of future bills (although the law mandates such analysis), many good proposals have been rejected, while respectively not as good or really bad had been approved almost unanimously. Anyway, with respect to this specific case the decision of the MP's should be admired, as well as the efforts by Mr. Dimitrov, which was well over those of the usual MP[2].

Is it necessary at all to have a discussion?

It certainly is necessary as this a sign of democracy. However let us see the arguments of the defenders of the requirement of minimal capital, as well as their reasons. In the first place what enters their vision is various side effects caused by the elimination or simply the lack of such requirement. The most often used argument, naturally is that the requirement for a minimal capital protects the creditors of the company, i.e. if there is no such requirement there would be all kind of funny companies, which would not pay their creditors. Such reasoning is very difficult to defend since it does not take into account the realities in the country. In Bulgaria, as in many other countries with similar requirement, immediately after registration of the company the minimum capital may be used for any other purpose. That means that the amount in question is not frozen in the bank waiting for the creditors, but simply is shown to the authorities when the business starts up. In addition a joint stock company could be registered with 25% of the registered capital, while the limited liability company with 70%. In other words, even if accept the claim that the minimal capital could be protecting the creditors (which is more likely to be untrue even in theory), at present in Bulgaria there is no way how this could happen for all practical purposes, since the requirement is met only formally. On the other hand, if the objective of a company is to accumulate bad debts, the minimal capital is probably the last thing, which would be an obstacle. For additional information on the topic I recommend the article by my colleague Mr. Peter Ganev – "The minimal capital of a company does not protect the creditors" – http://ime.bg/bg/articles/minimalniqt-kapital-za-firma-ne-zashtitawa-kreditorite/

It is interesting to pay attention to another argument in defense of the minimal capital – according to some claims it should not be small. But very large, since with a small amount of money there is no way to make business, while it is necessary to have larger and more stable companies. Naturally such comments are fare more superficial and untrue than the first category of arguments. It is hardly necessary to explain that the minimal capital does not reflect the money, which is invested.  In addition, I would like to add the following: if someone likes to see fewer companies on the market, oligopoly and monopolistic markets that means that he supports higher minimal capital. Those who are willing to accept such "exchange", however, must know the following – the above mentioned market form (or better types of competition) everybody could enjoy higher inflation and speculative pricing, about which there was a lot of discussions at present, in reality in most sectors they are not present because the number of companies is large and they could not establish cartels or even if it happens the negative effects are much weaker, than in the case when there are only 2 or 3 companies on the market. In other words, one of the things, which guarantee lower prices and higher standard of leaving in one economy, is the development of entrepreneurial ship. The respective measures which would not stimulate the creation of goods and services (because the company is exactly that) must be viewed as bad and should not be supported, while those from which an opposite effect is expected, as in the case with the reduction of the minimal capital requirement, must be supported.

[1] This purely political restriction naturally does not mean that all proposals by the opposition are per say good or better than those of the ruling majority (the opposite however is also true).

[2] We definitely have to mention the organized by him subscription to eliminated all obstacles before the entrepreneurs – http://www.martindimitrov.com/?p=279